FHA Mortgage Fees Increase for New Borrowers – Decrease for Refi’s

Getting a loan to purchase a condo has always been harder than getting a loan to purchase a home.

Lenders want to know that they will get their money back if they must foreclose on the property at some point in the future. If they think there is a good chance that the value will drop, then the lender is much less likely to agree to give out a loan.

While the value of single family homes is affected by general market conditions and how well the property is maintained, condos have an added element that affects their value.

Condominium communities are much more affected as a group by what is happening to the other units in the development. Large numbers of rental units tend to lower the value of a community, since landlords don’t invest as much in updating their units as owners who live in their condo, and vacated rental units put up for sale have much more wear and tear than owner occupied units.

Conventional vs. FHA Loans:

There are two basic categories of loans that the vast majority of buyers can obtain for their home or condo purchase.

Conventional Loans – Buyers who have good credit, low debt to income ratios and the funds to put down a 5-10% down payment can get a conventional loan. Conventional loans may have fixed or adjustable interest rates and can range from 10-40 years in length. Since conventional loan buyers are less likely to stop paying their loan than FHA buyers, they get better interest rates and don’t have to pay mortgage insurance once they have 20% in equity on the property.

FHA Loans – Buyers who don’t meet the qualifications to get a conventional loan may qualify for a FHA loan. These loans have lower credit score minimums, require lower down payments and allow for higher debt to income ratios. Since these buyers have a higher risk for default, lenders charge a higher interest rate and buyers are required to pay mortgage insurance on the loan regardless of how much they are putting down. (NOTE: Some buyers who do qualify for conventional loans will find it is a better deal for them to get a FHA loan, so you should check both options if you are planning on purchasing a property)

Condos and FHA Loans:

Since condos often appeal to first time buyers who lack the funds for a big down payment, many condo buyers find that they can only qualify for a FHA loan.

In order for a buyer of a condo to get approved for a FHA loan, the complex must:

be FHA approved

no more than 50% of the units can be rental units

have a certain % of units which do not have a FHA loan attached to the unit

The condo association has no control over how many owners have FHA loans on their properties. However, condo associations can control if the complex has been approved and the number of rental units.

In the past, if a complex had not gone through the process to obtain FHA approval, then a lender could arrange for a spot approval for the unit being sold.

As of February 1, 2010, FHA no longer offers spot approvals for condos.

How Does the Elimination of FHA Spot Approvals Affect Homeowners?

Bottom line…if a condo complex has not been FHA approved, it means that no buyer can get a FHA loan to buy a condo in that community.

If you own a condo that is valued below $250,000, the vast majority of buyers are going to need to get an FHA loan to purchase, and that means that they won’t be able to buy your condo if you tried to sell.

Fix the Problem Now Rather than Waiting until You want to Sell:

If you live in a condo community, you need to know if your association has obtained approval. You can check the link here to see if your community is on the FHA list.

You can also call your association trustee or management company and ask them if your complex is approved.

If the community is not approved, you need to insist that they apply to get approval unless your community clearly doesn’t meet the approval guidelines. The process may take 6-8 weeks to obtain approval, so don’t wait until you want to sell or you may find yourself with a contract that falls apart rather than closes.

It is also a good idea to know if you are close to the 50% rental rate. If you are, you may want to consider changing the community rules & indentures to cap the percentage of rental units allowed in the community.

Not planning on moving anytime soon…the value of your condo is affected by sales that happen now. If your neighbors have trouble selling because they can’t sell to a buyer who needs a FHA loan, then they will sell for less, and your condo’s value will drop.

Protect your investment and get your complex approved regardless of whether you plan to stay or sell.